Continental Illinois Nat Bank Trust Co of Chicago v. Chicago Ry Co Chase Nat Bank of City of New York v. Same Mississippi Valley Trust Co v. Same Harris Trust Savings Bank v. Same New York Trust Co v. Same Reconstruction Finance Corporation v. Same
| Decision Date | 01 April 1935 |
| Docket Number | 489,482,Nos. 489,Nos. 481,483,480,Nos. 483,Nos. 487,485,486,488,484,Nos. 479,487,Nos. 485,481,490,s. 479,s. 481,s. 483,s. 485,s. 487,s. 489 |
| Parties | CONTINENTAL ILLINOIS NAT. BANK & TRUST CO. OF CHICAGO v. CHICAGO, R. I. & P. RY. CO. et al. CHASE NAT. BANK OF CITY OF NEW YORK v. SAME. MISSISSIPPI VALLEY TRUST CO. v. SAME. HARRIS TRUST & SAVINGS BANK v. SAME. NEW YORK TRUST CO. v. SAME. RECONSTRUCTION FINANCE CORPORATION v. SAME |
| Court | U.S. Supreme Court |
In Nos. 479—488:
[Syllabus from pages 648-650 intentionally omitted] Messrs. Herbert A. Friedlich, of Chicago, Ill., Paul D. Miller, of New York City, Isaac H. Mayer and Carl Meyer, both of Chicago, Ill., Henry Root Stern, of New York City, Bertram F. Shipman, of New York City, T. M. Pierce and S. Mayner Wallace, both of St. Louis, Mo., and Hal C. Bangs, Edwin W. Sims, and Franklin J. Stransky, all of Chicago, Ill., for petitioners.
[Argument of Counsel from pages 650-652 intentionally omitted] The Attorney General, and Messrs. A. A. Berle, Jr., of New York City, and Cassius M. Clay, of Washington, D.C., for petitioners.
[Argument of Counsel from pages 652-656 intentionally omitted] Mr. Elihu Root, Jr., of New York City, for respondents Bondholders' Protective Committees.
Mr. Marcus L. Bell, of New York City, for respondents Trustees in Bankruptcy.
Messrs. James H. McIntosh, Clifton P. Williamson, and Edward W. Bourne, all of New York City, for respondent Protective Committee for Chicago, R.I. & P. Ry. Co. General Mortgage Bonds.
On June 7, 1933, the Chicago, Rock Island & Pacific Railway Co. filed a petition seeking a reorganization under section 77 of the Bankruptcy Act (11 USCA § 205), in the Federal District Court for the Northern District of Illinois, Eastern Division, alleging that it was 'unable to meet its debts as they mature.' Nine of the debtor's subsidiaries thereafter joined in the proceedings as permitted by subdivision (a) of the section. On September 26, 1933, the debtor filed a petition for instructions which alleged that it had outstanding collateral notes secured by mortgage bonds, part of which were issued by it, part by corporations forming a part of the system; that it had been unable to pay interest on its funded debt secured by mortgage liens on various portions of its property; that it would be obliged to default on interest about to become due on other mortgage bonds of the system; that the value of the collaterial securing each of the outstanding notes is substantially in excess of the loan thereby secured; that if holders of the notes should sell the collateral it would cause a substantial and irreparable loss to the trust estate; and that a forced sale of the collateral at the present time might result in a substantial deficiency judgment against the debtor and the depletion of the respective interests in the trust estate of all creditors in proportion to the rank and lien of the obligations by which their claims or interests therein are evidenced. The petition prayed that the court determine whether it should enjoin the holders of the collateral notes, in the event of a default, from selling any of the collateral.
Practically all of the collateral held by the banks and the Reconstruction Finance Corporation consists of bonds of the debtor and its subsidiaries. These bonds are secured by mortgages on the property of the system; and the collateral, therefore, constitutes fractional interests in the liens created thereby. The collateral pledged to the banks consists of bonds of the Rock Island or of bonds (guaranteed by the debtor) of one of the subsidiary corporations, wholly owned and operated under lease by the debtor. Six of the collateral notes, aggregating.$13,659,877.58, are held by the Reconstruction Finance Corporation and are secured by collateral of the face value of $41,702,465.85.1 The remaining notes, aggregating $4,125,000 in amount, and secured by collateral of the face value of $14,409,000,2 are held severally by five banks: The Chase National Bank and the New York Trust Company, of New York City, the Continental Illinois National Bank & Trust Company and Harris Trust & Savings Bank, of Chicago, and Mississippi Valley Trust Company, of St. Louis. Each of the collateral notes contains a provision that it shall become due in case of, among other events, (1) nonpayment of interest, (2) insolvency of the debtor, (3) appointment of a receiver for the debtor. Each note held by a bank provides also that it shall become due in case of nonpayment of interest on any of the notes held by the Reconstruction Finance Corporation. And all the outstanding notes provide that:
None of the noteholders was a party to the proceeding. No noteholder was ever served with process; and only the two Chicago banks were residents of the district. But notice of the intention to present the petition for instructions had been sent by registered mail to each of the noteholders, and also to the five protective committees representing security holders of the system.3 All of these parties were represented at the hearing. The holders of the collateral notes appeared specially, and objected to the jurisdiction of the court on the ground that (1) it had no jurisdiction of the person; (2) no jurisdiction over, or possession of, the property, the sale of which was about to be restrained; and (3) no jurisdiction to grant in a summary proceeding the injunction suggested; but it was stipulated that the noteholders might present argument and file briefs on the merits without waiving their special appearances. The Chairman of the Protective Committee of the First and Refunding Bonds of the Debtor set forth the facts relied upon as showing that unless the sale of the collateral was enjoined, it would be impossible to prepare, and secure approval of, a plan of reorganization. All of the appellants contend that the injunction entered, as hereinafter stated, was without legal justification. Only the banks renew here the challenge to the jurisdiction of the court to make the order in this proceeding.
The Chicago, Rock Island & Pacific system comprises over 8,000 miles of line, extending into more than one-fourth of the states of the Union, and into 20 federal judicial districts. At the commencement of this reorganization proceeding, its capitalization outstanding in the hands of the public was $459,059,808. Of this, $128,909,211 was in preferred and common stocks; $312,365,720 in bonded indebtedness; and $17,784,877 in the collateral notes here in question. In addition to the above, there were pledged as security for some issues of its funded debt bonds and stocks of the system aggregating $145,749,050; and as security for the collateral notes, the bonds and stocks above mentioned, aggregating $54,711,465. If, pending the reorganization, trustees for the bondholders and these noteholders should sell the pledged securities, the capitalization outstanding in the hands of the public would to that extent be expanded; and the aggregate capitalization might thereby become as much as $659,520,323.
By the Act of March 3, 1933, c. 204, 47 Stat. 1467 (see 11 USCA §§ 201 and note, 202—205), original jurisdiction, in addition to that theretofore exercised in voluntary and involuntary proceedings to adjudge persons bankrupt, was conferred upon courts of bank- ruptcy 'in proceedings for the relief of debtors,' as provided in sections 74, 75 and 77 of the act (11 USCA §§ 202, 203, and 205). We are here concerned only with section 77 (11 USCA § 205). That section contains provisions for the reorganization of railroads engaged in interstate commerce. It permits any railroad corporation which is insolvent or unable to meet its debts as they mature to effect a plan of reorganization.
It provides for the filing of a petition by the railroad corporation in a court designated by the act. If the petition be approved, the court, during the pendency of the proceedings, is given exclusive jurisdiction of the debtor and its property wherever located. The act requires that the railroad corporation shall be referred to in the proceedings as a 'debtor,' and permits any corporation, the majority of the capital stock of which is owned, or substantially all of whose properties are operated, by the debtor under lease or operating agreement, also to file a petition in the same proceeding stating that it is insolvent or unable to meet its debts as they mature and that it desires to effect a plan of reorganization in connection with the plan of the original debtor.
Other provisions of the section direct that a plan of reorganization shall include a proposal to modify or alter the rights of creditors generally or of any class of them, secured or unsecured, either through the issuance of new securities or otherwise; that it shall provide adequate means for its execution; that the term 'creditor' includes 'all holders of claims, interests, or securities of whatever character against the debtor or its property,' 11 USCA § 205(b)(4); and that, if the plan is not proposed or accepted or confirmed within a reasonable time to be fixed by the judge, he may dismiss the proceeding.
Before acceptance of any plan, the Interstate Commerce Commission is directed to hold a public hearing, following which it shall render a report recommending a plan which 'will, in its opinion be equitable, will not discriminate unfairly in favor of any class of creditors or stockholders, will be financially advisable * * * and will be compatible...
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